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Multi-currency accounts for investing with Trading 212
Visualise a trading world without boundaries, where multiple currencies flow seamlessly through your portfolio.
This article is an informative read that proves how a multi-currency account can be a game-changer.
This article is an informative read that proves how a multi-currency account can be a game-changer.
Big ideas
- Multi-currency accounts allow you to hold and manage different currencies under one account. Investors who want exposure to various markets can take advantage of it by diversifying across currencies and mitigating risks associated with currency fluctuations.
- Understanding the impact of currency fluctuations on international investments is crucial; a weakening currency can erode foreign investment returns when converted back to your home currency.
- Having a multi-currency account reduces conversion costs and simplifies transactions, as investors don’t need multiple accounts.
Introduction to multi-currency accounts
For the modern investor, flexibility and efficiency are essential, and multi-currency accounts combine all these needs.
These accounts cater to individuals looking to broaden their investment horizons across international borders. With Trading 212, managing a multi-currency account in the UK has become more accessible than ever before.
These accounts cater to individuals looking to broaden their investment horizons across international borders. With Trading 212, managing a multi-currency account in the UK has become more accessible than ever before.
DEFINITION
Multi-currency accounts are financial accounts that allow users to hold, manage, and transact in multiple currencies from a single platform.
Using a multi-currency account is an efficient way to invest across worldwide exchanges. It allows for allocating funds in various currencies, a feature particularly attractive for those investing in foreign stocks or other assets.
EXAMPLE
Let’s say you are a UK investor impressed by Apple's earnings power and stock price performance (AAPL), an American company listed on the Nasdaq.
Apple’s share price is in US dollars, so to invest in Apple stock, the Trading 212 app automatically converts your British pounds (GBP) into US dollars (USD) and then buys the stock. This currency conversion, although convenient, incurs a fee of 0.15% FX charge.
You can avoid this conversion by depositing dollars straight from your bank account.
Apple’s share price is in US dollars, so to invest in Apple stock, the Trading 212 app automatically converts your British pounds (GBP) into US dollars (USD) and then buys the stock. This currency conversion, although convenient, incurs a fee of 0.15% FX charge.
You can avoid this conversion by depositing dollars straight from your bank account.
How does currency conversion affect your positions?
By holding funds in the same currency as the asset (e.g. holding US dollars to buy Apple), you can avoid repeated conversions and potentially reduce costs associated with currency exchange.
The two main factors you should consider when exchanging currencies are the Forex rate (at which one currency will be exchanged for another currency) and the spread/brokerage fees:
The two main factors you should consider when exchanging currencies are the Forex rate (at which one currency will be exchanged for another currency) and the spread/brokerage fees:
Forex rate
The exchange rate can affect trade and is impacted by both the domestic currency value and the foreign currency value. It is always represented by two currencies.
For example, at the time of writing this, the exchange rate from USD to GBP is $1.26. This means that it takes $1.26 to purchase £1.
For the Apple investment, a UK investor would be concerned with GBP/USD - the exchange rate for British pounds vs US dollars. A spread might be visualised like this:
For example, at the time of writing this, the exchange rate from USD to GBP is $1.26. This means that it takes $1.26 to purchase £1.
For the Apple investment, a UK investor would be concerned with GBP/USD - the exchange rate for British pounds vs US dollars. A spread might be visualised like this:
Source: Trading 212You can see that the price to sell GBP/USD is 1.26263 while the price to buy is higher at 1.26295, a difference of 0.00032 The more frequently you exchange currencies, the more often you will pay the spread.
With Trading 212, you can benefit from the interbank rates without additional markup. This means accessing the rates at which financial institutions trade currencies with each other directly.
With Trading 212, you can benefit from the interbank rates without additional markup. This means accessing the rates at which financial institutions trade currencies with each other directly.
Spread and brokerage fees
The spread is the difference between the Buy (bid) and Sell (ask) price. The Buy price is the one buyers are willing to pay for a stock at the current moment, while the Sell price is what sellers are asking for the same asset.
Spreads offered by different brokers are usually floating, meaning they can tighten or widen based on the asset’s liquidity, volatility, and others. As an investor, you should be aware that during lower liquidity or increased market volatility, you can experience a wider spread.
Learn more about liquidity and how it can affect your portfolio.
While considering the fee structure is a key step in assessing which broker to invest with, keep in mind you can face potential hidden charges. On the contrary, we have mentioned the applied fees here.
Spreads offered by different brokers are usually floating, meaning they can tighten or widen based on the asset’s liquidity, volatility, and others. As an investor, you should be aware that during lower liquidity or increased market volatility, you can experience a wider spread.
Learn more about liquidity and how it can affect your portfolio.
While considering the fee structure is a key step in assessing which broker to invest with, keep in mind you can face potential hidden charges. On the contrary, we have mentioned the applied fees here.
Understanding the options for multiple currency accounts
Multi-currency accounts allow you to hold multiple currencies within a single investing account. The main purpose is to avoid any FX fees and deposit and invest across multiple currencies.
The concept helps you to facilitate a quick and agile response to market movements and to enable the execution of trades across different currencies.
The concept helps you to facilitate a quick and agile response to market movements and to enable the execution of trades across different currencies.
Pros and cons of opening a multi-currency account
Here are some of the positives of having an account with multiple currencies:
BENEFITS OF MULTI-CURRENCY ACCOUNTS
✔️ International investing from one account, avoiding FX fees
✔️ Diversification of the currency exposure
✔️ Currency hedging
✔️ Rapid response to market changes and real-time currency conversion without any delays
✔️ Diversification of the currency exposure
✔️ Currency hedging
✔️ Rapid response to market changes and real-time currency conversion without any delays
On the contrary, you should also consider the currency conversion risk. When using a multi-currency account, you should look out for potential currency depreciation or a decrease in the value of a currency compared to other ones.
Opening a multi-currency account in the UK
A multi-currency account can be opened in the UK through a bank or investing app. The first option usually comes with additional fees and a minimum account balance usually around £25,000.
On the other hand, you can use an investing app like Trading 212 to have one account that can hold multiple currencies. This can all be done online via a web or mobile application in just a matter of minutes.
All regulated providers will require standard identification and residency verification documents to open an account. Due diligence on the provider's part is a regulatory requirement designed to protect both the institution and you as a customer. Be very wary of any company that does not request verification.
The Trading 212 online application has made this process easier, often requiring just a digital copy of your identification.
On the other hand, you can use an investing app like Trading 212 to have one account that can hold multiple currencies. This can all be done online via a web or mobile application in just a matter of minutes.
All regulated providers will require standard identification and residency verification documents to open an account. Due diligence on the provider's part is a regulatory requirement designed to protect both the institution and you as a customer. Be very wary of any company that does not request verification.
The Trading 212 online application has made this process easier, often requiring just a digital copy of your identification.
Choosing and investing in currencies as an asset class
When deciding which currencies to hold within a multi-currency account, investors might look at those with the potential for income and capital growth. This involves analysing economic fundamentals, interest rate trajectories, and fiscal policies of the countries in question.
Investing in currencies as an asset class involves understanding the factors that influence currency values, including economic policies and geopolitical events. This generally falls under the umbrella of macroeconomic analysis, something not as important to picking stocks but certainly important for asset allocation.
Investing in currencies as an asset class involves understanding the factors that influence currency values, including economic policies and geopolitical events. This generally falls under the umbrella of macroeconomic analysis, something not as important to picking stocks but certainly important for asset allocation.
GBP/USD price chart
Source: Trading 212. Past performance doesn’t guarantee future results.Trading 212’s multi-currency account feature provides a facility for investors to allocate a portion of their portfolio to foreign currencies, which can be seen as a way to diversify and potentially capitalise on economic trends. Moreover, you can earn daily interest on your uninvested cash.
For example, if you’re feeling particularly gloomy about UK politics or economics and suspect it may negatively impact the value of the British pound, you might choose to hold some of your free cash in US dollars, euros or other major global currencies.
For example, if you’re feeling particularly gloomy about UK politics or economics and suspect it may negatively impact the value of the British pound, you might choose to hold some of your free cash in US dollars, euros or other major global currencies.
Diversifying currency exposure for portfolio protection
Diversification across currencies is another way to strengthen your portfolio against adverse market moves or during a bear market. By utilising a multi-currency account, investors can allocate resources in different currencies, potentially benefiting from varying economic cycles. This approach should not be mistaken for speculative trading but rather as a way to spread exposure.
Despite that, the decision to leverage multiple currencies requires careful consideration of market dynamics and personal investment goals, always bearing in mind the unpredictable nature of the forex market.
Despite that, the decision to leverage multiple currencies requires careful consideration of market dynamics and personal investment goals, always bearing in mind the unpredictable nature of the forex market.
Making use of multi-currency accounts and the tools they offer
When considering an overseas investment, adding currency analysis to your standard analysis toolkit is worthwhile. Making informed investment decisions already entails a deep dive into a stock's financial metrics. However, considering the economic indicators that influence currency strengths is also important if you’re investing in a foreign stock.
Investors might look at inflation rates, political stability, and trade balances. Conducting this level of analysis can seem daunting, but it is accessible with today's resources. Analytical tools provided by multi-currency platforms like Trading 212 can help investors gather and interpret relevant data to make an informed decision.
Here are a few examples of how you can take advantage of the tools that multi-currency accounts offer:
Investors might look at inflation rates, political stability, and trade balances. Conducting this level of analysis can seem daunting, but it is accessible with today's resources. Analytical tools provided by multi-currency platforms like Trading 212 can help investors gather and interpret relevant data to make an informed decision.
Here are a few examples of how you can take advantage of the tools that multi-currency accounts offer:
1. Conducting in-depth currency analysis for investment decisions
EXAMPLE (PART 1)
A British investor buys Tesla (TSLA) with the expectation that they can sell it for a 10% gain in the next 24 months. They do so instead of buying shares of Shell (SHEL), which they expect to rise by only 6% over that period.
Let’s say Tesla stock did go up by 10%, but at the same time, the value of the US dollar fell by 5% versus the British pound. When they convert their profit back to pounds, it drops from a 10% gain in USD to only a 5% gain in GBP. That means had their Shell stock prediction has also been correct, they would have been better off collecting the 6% return from Shell in GBP, which involved no foreign currency risk.
Let’s say Tesla stock did go up by 10%, but at the same time, the value of the US dollar fell by 5% versus the British pound. When they convert their profit back to pounds, it drops from a 10% gain in USD to only a 5% gain in GBP. That means had their Shell stock prediction has also been correct, they would have been better off collecting the 6% return from Shell in GBP, which involved no foreign currency risk.
2. Managing risk through currency hedging techniques
Hedging strategies are usually thought of as a way to protect an investment from an expected short-term adverse market move in the investment itself. You can hedge your ownership of stock XYZ by going short in stock ZYX if you think the tech sector might temporarily underperform.
Hedging can also be relevant for retail investors with multi-currency accounts. For our British investor investing in Tesla, which is listed on the NASDAQ in the United States, the primary concern would be the fluctuation in the GBP/USD exchange rate.
Hedging can also be relevant for retail investors with multi-currency accounts. For our British investor investing in Tesla, which is listed on the NASDAQ in the United States, the primary concern would be the fluctuation in the GBP/USD exchange rate.
DEFINITION
Currency hedging is a technique used to manage and mitigate the risk associated with currency exposure in an investment portfolio.
If the pound weakens against the dollar after the investment is made, then the value of Tesla stock in GBP terms would increase even if the stock price in USD does not change; conversely, if the pound strengthens, the value in GBP could decrease even if the stock price in USD goes up.
EXAMPLE (PART 2)
The investor is worried that GBP will strengthen against the USD (which would reduce the GBP value of their Tesla investment). They decide to hedge by converting an equivalent amount of GBP in their multi-currency account to USD at the current rate.
By holding USD in their multi-currency account, they are effectively ‘locking in’ the current exchange rate for the investment. Also, by enacting the hedge, they have removed the currency risk but also removed the possibility of benefitting from an advantageous move in the foreign exchange (FX) market.
By holding USD in their multi-currency account, they are effectively ‘locking in’ the current exchange rate for the investment. Also, by enacting the hedge, they have removed the currency risk but also removed the possibility of benefitting from an advantageous move in the foreign exchange (FX) market.
3. Rebalancing a currency portfolio over time
Exchange rates and market conditions change, so it makes sense to take a ‘dynamic’ approach to adjusting what currencies you are holding without becoming a forex day trader.
During times of currency volatility, one might consider the option of rebalancing their currency portfolio. This process involves adjusting the proportions of different currencies held in response to significant currency fluctuations and changes in the economic landscape.
During times of currency volatility, one might consider the option of rebalancing their currency portfolio. This process involves adjusting the proportions of different currencies held in response to significant currency fluctuations and changes in the economic landscape.
EXAMPLE (PART 3)
As the value of Tesla stock and the GBP/USD exchange rate change, you may need to adjust the amount of currency you have converted to maintain an effective hedge. If the stock value goes up, you might convert more GBP to USD to maintain the hedge proportion. Conversely, if the stock value goes down, you might convert some USD back to GBP to reduce the hedge.
It's not about timing the market or predicting currency shifts but rather about making adjustments to maintain a desired level of exposure. Such a measured approach to portfolio rebalancing can be a methodical way to manage potential risks associated with currency movements.
Monitoring economic factors impacting currency values
It’s important to monitor economic factors, especially when holding multiple currencies or hedging positions with foreign assets. Some of the economic factors that can influence currency values include:
- Interest rate changes
- Inflation data
- Economic growth metrics
- Political stability
- Others
It is best to access such information through economic calendars and real-time news feeds to keep an eye on the different indicators and ensure you don’t get caught off guard. Being informed about economic developments allows for a more strategic approach to when one might convert currencies within their multi-currency account or rebalance their investment holdings.
Record keeping for tax reporting of foreign currencies in the UK
For UK investors managing a multi-currency account, precise record-keeping is fundamental for tax reporting purposes. HM Revenue & Customs (HMRC) requires a detailed account of all transactions involving foreign currencies, including the dates, amounts, and the relevant exchange rates at the time of each transaction.
Keeping meticulous records ensures accuracy when declaring any capital gains or losses on your tax return. The activity statements and annual tax statements provided by Trading 212 include a comprehensive log of all currency transactions throughout the financial year.
While managing a multi-currency account is very much doable by yourself, there may be occasions when seeking expert advice could be beneficial. This is particularly relevant when crafting a comprehensive currency strategy or when facing complex financial decisions involving significant sums or a variety of currencies.
Expert advice can provide clarity and confidence, ensuring that your approach is informed and well-considered. It’s prudent to consult with a professional when navigating unfamiliar economic territories or when regulatory changes might affect your currency holdings.
Keeping meticulous records ensures accuracy when declaring any capital gains or losses on your tax return. The activity statements and annual tax statements provided by Trading 212 include a comprehensive log of all currency transactions throughout the financial year.
While managing a multi-currency account is very much doable by yourself, there may be occasions when seeking expert advice could be beneficial. This is particularly relevant when crafting a comprehensive currency strategy or when facing complex financial decisions involving significant sums or a variety of currencies.
Expert advice can provide clarity and confidence, ensuring that your approach is informed and well-considered. It’s prudent to consult with a professional when navigating unfamiliar economic territories or when regulatory changes might affect your currency holdings.
Recap
Flexibility, convenience and reduced costs are some of the key characteristics of multi-currency accounts. Investors, however, should be aware of the potential negative effect in case a particular currency decreases, as this can affect the total account balance after converting to the primary currency.
For the modern investor, this type of account provides a smart way to maintain the possible impact FX may cause on your position while also allowing you to invest in assets with different base currencies without any hassle.
For the modern investor, this type of account provides a smart way to maintain the possible impact FX may cause on your position while also allowing you to invest in assets with different base currencies without any hassle.
FAQ
Q: How to invest in multiple currencies?
To invest in multiple currencies, you can open a multi-currency account with a financial institution or investment platform that allows you to hold and manage funds in various currencies. This enables you to invest directly in foreign assets or keep different currencies for future investment opportunities.
Q: Why invest with different currencies?
Investing using different currencies can help diversify your portfolio, potentially reducing risk by spreading investments across various economic regions.
It also allows you to capitalise on the appreciation of one currency against another, which can enhance investment returns when converted back to your base currency.
It also allows you to capitalise on the appreciation of one currency against another, which can enhance investment returns when converted back to your base currency.
Q: Can you invest in a different currency?
Yes, you can invest in a different currency by using a multi-currency account to purchase foreign-denominated assets, such as stocks, bonds, or real estate.
This gives you the flexibility to hold investments in the currency of the country where the asset is located, which may offer advantages in terms of exchange rate movements and economic developments.
This gives you the flexibility to hold investments in the currency of the country where the asset is located, which may offer advantages in terms of exchange rate movements and economic developments.
- Foreign Exchange (Forex): The global marketplace for trading currencies, where exchange rates fluctuate based on supply and demand.
- Currency Fluctuations: Changes in the value of a currency relative to another, influenced by factors such as economic conditions, trade balances, and market sentiment.
- Conversion Costs: Fees or charges incurred when exchanging one currency for another, which can include spreads, transaction fees, and bank markups.
- Interbank Rates: The exchange rates at which banks trade currencies with each other, typically lower than the rates offered to retail customers.
- Interest Rates: The percentage cost of borrowing money or the return earned on savings and investments, which fluctuates based on economic conditions.
